Inframarginal Borrowers and the Mortgage Payment Channel of Monetary Policy

Daniel R. Ringo
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Daniel R. Ringo: https://www.federalreserve.gov/econres/daniel-r-ringo.htm

No 2024-069, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Despite the widespread use of fixed-rate mortgages in the United States, I show that monetary policy is effectively passed through to aggregate outstanding mortgage debt service. Using credit bureau, lender, and servicer data on mortgage payments and originations and exogenous monetary policy shocks, I estimate a mortgage rate semi-elasticity of payments over 10. Inframarginal borrowers---households whose choice to buy a home or refinance does not depend on the particular monetary policy decision under consideration---are the most important conduit, explaining over half of the pass-through. Consistently large flows of inframarginal borrowing relative to the stock of outstanding debt account for the strength of this channel. Households with adjustable-rate mortgages and marginal refinancers, the focus of much of the literature on monetary policy's effect on mortgage borrowers, each explain about 20 percent of the pass-through. I show the mortgage payment channel induces a lag in the operation of policy, as the cumulative effects on debt service build over time in response to persistent shocks to longer-term rates. Estimated magnitudes suggest that mortgage payments are a primary channel by which monetary policy affects consumption.

Keywords: Monetary policy; Interest rates; Refinancing channel; Debt service (search for similar items in EconPapers)
JEL-codes: E43 E52 G21 (search for similar items in EconPapers)
Pages: 45 p.
Date: 2024-08-23
New Economics Papers: this item is included in nep-cba, nep-mon and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2024-69

DOI: 10.17016/FEDS.2024.069

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